Watch out for inflation

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As of Friday, the average price of regular gasoline was $3.74 a gallon. The Oil Price Information Service thinks it may rise to $4.25 a gallon by the end of April. That would exceed the all- time record of $4.11, set in July 2008.

But software entrepreneur Louis Woodhill thinks the price of gas would have to rise by 65 cents to 75 cents per gallon just to be "normal," he wrote in Forbes magazine Feb. 22.

"Gas prices aren't rising," agreed Fox News business analyst Neil Cavuto. "The dollar is falling." At least relative to the price of gold.

Mr. Woodhill illustrated this point by comparing how much gold is required to buy a barrel of West Texas Intermediate crude oil today, and for 41 years past. Currently, it takes 0.0602 ounces of gold to buy a barrel of "black gold."

"Today's WTI price (in gold) is only 82 percent of its average for the past 41 years," he said.

The amount of gold required to buy a barrel of oil hasn't changed much. But 41 years ago, you could buy an ounce of gold for $35, a barrel of WTI for $3.56, Mr. Woodhill noted.

The restrictions the Obama administration has imposed on drilling for oil in the Gulf of Mexico and on public lands has made the price of oil higher than it otherwise would be. So has the president's decision to cancel the Keystone XL pipeline. But it's the government's fiscal and monetary policies that are chiefly responsible for the oil price squeeze we're experiencing now.

The problem began in August 1971, when President Richard Nixon abrogated the 1944 Bretton Woods agreement, in which other nations pegged their currencies to the value of the dollar and the dollar was pegged to the price of gold.

To prevent a run on the gold in Fort Knox, Nixon terminated the convertibility of the dollar to gold. That made the dollar a "fiat" currency -- its value floating against that of other currencies and backed only by the promises of the federal government.

Those promises haven't been worth much. Inflation happens when the supply of money in an economy increases more than the production of goods and services. Politicians like inflation because they like to spend more than the government receives in tax revenue. By "monetizing the debt," the government can obscure the size of deficits and repay them with cheaper dollars.

There are two steps. The government issues debt to finance its spending, and the central bank purchases the debt. The massive budget deficits racked up by the Obama administration, coupled with the artificially low interest rates imposed by the Federal Reserve Board and its policy of "quantitative easing," have increased the base money supply by about $1.45 trillion.

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